Romania's economy

What's that giant sucking sound?

IT SOUNDED like the jaded complaint of an "Occupy Wall Street" protester: banks are greedy, they gambled with risky loans and now they are holding their hat out again. Only this time the remarks came from a president.

Last week Austrian regulators ordered three of the country's major banks to limit cross-border loans to eastern Europe in order to meet European Union capital requirements. Traian Basescu, Romania's president, didn't like what he heard. "The announcement... was either a mistake or a lack of understanding when it comes to its effects", he said at an Economist conference in Bucharest last week.

He went on to remind his "European friends" that Austrian banks had made "huge profits" in Romania. "I wouldn't want to see us, countries that joined the EU later, paying the bill for banks' greed, imprudence and irresponsibility", he thundered, warning banks not to "choke" the Romanian economy. Over 30% of Romania's banking sector is in Austrian hands. 22% is Greek-owned, and Portuguese, Italian and French banks are also present in the country.

Central bankers at the Economist conference argued that the system is still solid, and that the risk that subsidiaries could fall bankrupt and need renationalisation is "zero". Even if parent banks are restricting capital flows, Romania remains attractive compared to other countries in the region, said Cristian Popa, a vice-governor of Romania's central bank.

But there are real risks to eastern Europe of serious spillover effects from the euro-zone crisis. In a recent analysis Erik Berglof, chief economist of the European Bank for Reconstruction and Development, warns of the possible effects on banks' foreign subsidiaries.

"[T]he capacity of Western European governments to backstop banking systems is clearly reaching its limits," he writes. "Allowing foreign banks' subsidiaries to become orphaned amid a worsening crisis in home countries would undermine confidence in emerging Europe's financial systems."

A month ago, in Brussels, Mr Basescu thought that he had secured stricter requirements for banks not to drain capital from their subsidiaries when EU leaders sealed a deal on bank recapitalisation. But it turns out to be non-binding. And with the Austrian bank Erste reporting €726 million losses in Romania and Raiffeisen Bank flip-flopping on a possible pull-out from the region, the president's fears do not seem that far-fetched.

Losses of $1 bn. in Romania? In how much time? I can imagine only one way in which one can lose so much money in that relatively small economy: the bank "invested" in real estate in '07 and it didn't take into account the possibility that the Romanians will devalue their currency. Really, if you look at the Romanian economy, there were just not that many opportunities to lose... and where did the money go?

Blaming the Romanians for the bank's own mistakes may be just a face-saving strategy. But now I wonder: given the economic forecast for the euro area, where are these banks planning to make a profit? If banks cannot make a profit in Romania, then where?

our curency is far from devalued, it is one of the strongest in the region, if anything, it could do with a little bit of easing in connection to the Euro in order to increase our exports.
The structural problem in Romania is that the vast majority of private debt is in Euro's which means that should the RON (the romanian currency) fall in relation to the Euro the effects on the population will be immediate and strongly negative.
This is the reason why the Romanian national bank insists in having a strong currency and does not let it devalue by considerable amounts.

Well, if I'm correct, the new credit limit is 110% of savings and other assets in a given country. I agree that it is too strict, on the other hand, I understand that in current uncertain times, banks don't want to risk because Austrian banks are in quite serious troubles.

One of the consequences is that the troubled banks are being sold to suspicious capital. For example, the whole Volksbank is being sold to Putin's Sberbank. Do we really wish major European banks to get to the hands of Russian, Chinese, or Arab-Sheiks owners?

„troubled banks are being sold to suspicious capital. For example, the whole Volksbank is being sold to Putin's Sberbank. Do we really wish major European banks to get to the hands of Russian, Chinese, or Arab-Sheiks owners?”

They would sell their grandma to the Russians for a fast buck, let alone some obscure subsidiaries in Eastern Europe.

It’s three years since this Romanian president preaches austerity measures at the expense of the population. He slashed through state budgets, sacked public workers in the hundreds of thousands, and a staggering 25 % reduction in state worker wages. For the year to come he foresees more hundreds of thousands of public sector lay-offs and smaller budget deficits.
Yet, when he happened to say something about the banks, suddenly he is a bad guy, likened to the Occupy Wall Street protesters.

OH WELL, but does anyone care if that 110% loans to deposits ratio, under deposits include all supranational loans (EBRD, IFC, EIB and similar), local market financing done by subsidiaries locally and on top of this applies only to newly issued loans?
I would consider this to be simply PRUDENT, but not a major growth obstacle. I would not be happy to see any 20-30% loan growth rates? The same, as requiring to lend in local currencies and not fancy CHFs or asking prudently to pay up at least 15% or so.
CEE is deleveraging, as the whole world is, but it is still the region with is 1. lowest leverage levels (except hungary) 2. higher growth than Eurozone (higher by some +2 or +3%), able to adjust swiftly (anyone compares Lithuanian or Latvian adjustments with internal devaluation in magnitude of 20%+ WITHOUT greek style protests?). People in CEE still remember those hard times during 1990 decade, and are willing to work harder and complain less, and will work their way out silently.

And all this talk of banks leaving their daughter banks in CEE countries? Well, anyone heard Mr. Stepic from Raiffeisen original comments, or this is just about "lost in translation" quotes taken from the context? I somehow read these quotes being

And one more, during 2008-2009 financial crisis, these markets were also first cut off from financial markets, therefore they needed and started the hard way to balancing the budgets from year 2009, while some "core" countries finally understood it now, and their apropriate measures, are kicking in only now, or will kick in 2012 (CEE is 2-3 years ahead).

So please, please, just think, see and understand what happens locally, not just read what some bank analysts or newspapers write up from new york or london, where every headline needs to be crisis-tilted.

Probably CEE is not recession proof, but still CEE will grow fast, even if it needs some swift adjustment next quarters for its exports.

I mean be greedy when other are fearful, and fearful when others are greedy? And please, please just remember this current mood, when CEE banks will be trading at 2 P/BV+. But I am afraid, and I guess, we will be reading about prospective investment with nice convergence growth stories.

'I am not letting them take our financial services to Frankfurt' - quote from the British Prime Minister statement following discussions held with Eurozone countries (namely France and Germany) on supporting the EURO.
No less pathetic than the Romanian president's statement I should say.

Banks haven't lost much in Romania though the real estate market has fallen significantly. Romanian law does not allow, as far as I know, private individuals to get away by having their homes foreclosed. The individual still owes the bank what is left of the mortgage. It seems absurd and completely unfair but this is why banks in Romania have not fared badly at all, as they should have if they were operating in a similar environment but the legal system being more "normal" and letting the individual give his home back to the bank and not pay the remaining amount. Bank risked too, but according to the Romanian law banks can't lose. The Erste loss in Romania is due to its take-over (slightly more than half the shares) of BCR (Romanian Commercial bank) in 2006 for about 3 billion euros, which is definitely not the value today, so the correct book to market.

Erste Bank posted an operating profit in Romania of 16 M Euro for 9 month ended 30 Sept 2011, increased lending by 1%, increased capital by 144 M Euro and is acquiring the 30% of BCR it does not yet own. The 726 M Euro loss is the goodwill impairment on the 3 billion or so Euro of goodwill paid upon acquisition of 70% of BCR just before Romania joined E.U. The problem president Basescu has is not with Erste but with the Austrian regulator.